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Peabody Energy Is Having a Fire Sale

Investors still think highly of this company despite its fire-sale price.

The world's top value investors love it when their best stocks ideas are selling at bargain-basement prices. For those rarified investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy-one-get-one" sale on their stocks.

Less than a year ago Peabody Energy(NYSE: BTU) was trading for more than twice the price it currently is, but an unrelenting attack on the coal industry by the current administration has brought the coal miner low. Although it's bounced 31% from its nadir and seems to be on a comeback trail, you'll naturally want to do more due diligence before buying in. Still, this might be an opportunity to pick up a quality stock at a severe discount.

Peabody Energy snapshot:

Market Cap

$6.4 billion

Revenues, TTM

$8.3 billion

1-Yr. Stock Return

(50.5%)

Return on Investment

7.4%

Dividend & Yield

$0.34/1.43%

Est. 5-Yr. EPS Growth

18.3%

52-Week High

$47.36

Recent Price

$23.70

CAPS Rating

****

Source: FinViz.com

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

A dirty wordWhen "clean energy" alternatives hold sway in policy-making decisions, "dirty" industries like coal are given short shrift. The natural gas industry is slowly grinding coal under its heel despite prices for both being at historically depressed levels. The difference is that there are incentives for the use of natural gas; no one's pushing for more coal use, so we see utilities converting from coal-fired plants to natural gas even as drillers are abandoning the field for oil and liquids.

According to the Energy Information Administration, 27 GW of coal-fired capacity from 175 generators will be retired over the next five years, a stunning amount that's four times greater than the amount retired over the previous five-year period.

Weak pricing and higher costs caused BHP Billiton(NYSE: BHP) to plan to shut one of its mines next month, while Xstrata is reorganizing its coal business. The only real hope for the coal industry is China, which doesn't have the same animus toward it as the U.S. Yet, with an economy coming in for a much harder landing than expected, that may be hard to pull off.

But, on the heels of Europe's proposed bond buyout and the Fed readying another round of quantitative easing, China announced a new $125 billion stimulus plan for the country's infrastructure. The make-work proposal had steel giants like AK Steel(NYSE: AKS) jumping on the news, and coal miners including Peabody, Arch Coal(NYSE: ACI), and Walter Energy(NYSE: WLT) rising on the hopeful news. Yet there's an awful lot of backlogged inventory in both industries to work through before new demand will be felt. Even then spending trillions to get out of a recession hasn't proved to be a successful elixir so far, either here at home or in Europe.

Worse, metallurgical coal pricing isn't about to get any better with one analyst saying it could hit $175 a ton in the fourth quarter, 17% below its current price. Even with BHP, Xstrata, and others working to shore up the supply part of the equation, demand will be weak regardless of what China's doing.

Peabody's second-quarter earnings saw revenues come in flat and profits fall 28% from the year-ago period. Domestic mines are laying off workers, Patriot Coal was forced into bankruptcy, and Arch turned last year's $76 million profit into a current-year $22 million loss. The industry is anything but a picture of health, and the "supercycle" in coal that Peabody had been counting on didn't materialize.

As the largest U.S. coal producer, Peabody should survive the tumult better than most, but that doesn't mean it will thrive in the current regulatory environment. I had rated the coal miner to outperform the markets earlier this year on the assumption that most of the bad news was factored in, and though it's still down 10% from the time I made that call (compared to a 5% jump in the S&P 500), I'll be maintaining that rating despite the ugly metrics the industry presents. At just seven times earnings it seems cheap enough to wager that it can still stand tall. But let me know in the comments section below if you think Peabody Energy will serve simply as the canary in the coal mine for the rest of the industry.

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Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow him on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.